Global manufacturing slumps over EU crisis

London, June 22, 2012

The downturn in the euro zone's private sector is becoming entrenched and Chinese factories are finding the going tough, business surveys showed yesterday, painting a darker outlook for the world economy.

US manufacturing grew in June at its slowest pace in 11 months and hiring slowed as overseas demand for products waned. The number of Americans filing new claims for unemployment benefits was also little changed last week, according to the Labour Department.

June is the fifth consecutive month when activity across the euro zone has declined, dragging down Germany and France and putting pressure on the European Central Bank to further support the economy.

The euro zone's private sector contracted at its fastest pace since June 2009, when the bloc was mired in a deep recession, according to Markit's Flash Composite Purchasing Managers' Index (PMI) for June.

A combination of services and manufacturing sectors seen as a guide to growth, the PMI fell to 46, slightly better than the fall to 45.5 predicted by economists in a poll. But the index has been below the 50 mark that divides growth from contraction in all but one of the last 10 months.

"The only remotely positive spin that can be put on the dismal euro zone (PMI) is there that was no further deepening in the rate of contraction," said Howard Archer at IHS Global Insight.

The data pointed towards a second quarter contraction of around 0.6 per cent, Markit said.

Having held steady at the start of the year, the bloc's economy will contract 0.2pc in the current quarter and narrowly escape recession by stagnating again in the next, according to economists.

Data from Germany, Europe's largest economy, showed its manufacturing sector contracted at its fastest pace since June 2009, while the services sector barely expanded, posting its lowest reading in seven months.

In France, activity declined in both sectors, albeit at a moderate pace than last month.

"For the time being, and if we cannot sort out the financial crisis, the euro zone is likely to remain in recession," said Dominique Barbet at BNP Paribas.

While the euro zone has not met the technical definition of recession by putting in two consecutive quarters of contraction, many consider growth is so poor that it might as well have.

Risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.

In China, the factory sector shrank for the eighth straight month in June as export orders sentiment hit its weakest level since 2009, indicating the economic trough may extend into the third quarter.

The HSBC Flash Purchasing Managers Index, the earliest monthly indicator of China's industrial activity, fell to a seven-month low of 48.1 in June from 48.4 in May.-Reuters